what about if, instead of taxing capital gains, you just taxed capital. say 1.5% of your net-worth every year, or something along those lines. i get that there'd still be accounting difficulties, but let's just assume that there weren't. everyone reports honestly - would that work?

i'd guess capital flight would probably be a problem - but how about we pretend that all governments around the world agree to enforce the tax.

None of these are arguments for raising the cap gains tax back to what it was under Reagan and Clinton. That seemed to work fine. The effective capital gains rate is at it's lowest point since 1957: http://www.taxpolicycenter.org/taxfa....cfm?Docid=161

Oh, I totally agree. I think capital gains should be taxed (for a whole bunch of reasons like progressivity, limiting the incentives to disguise salary as "cap gains" etc). I was just responding to the question about the viability of relying solely on a cap gains tax.

- If we're assuming that everyone reports honestly and that foreign governments agreed to enforce the tax, you could probably make almost any tax regime work, including that one, but those are two preeeetty big assumptions.

- You are setting up a system that slighty encourages spending at the expense of savings (because a saved dollar gets taxed while a spent one does not). And you're also encouraging people to invest in more liquid assets like stocks instead of physical buildings that might be harder to sell if you needed to raise money to pay your taxes. Not necessarily saying that those would be bad things, just saying that those would be the likely consequences of the system.

First add a wage tax. Alice and Bob each work a day, earn a dollar, pay 50 cents tax and have 50 cents left over.

Alice spends her fifty cents right away buying the things she and bob produce at their respective workplaces.

Bob invests his fifty cents in the company Alice works for.

Bob waits for it to double, due to the profits the company Alice works for makes off the work of done by Alice via the purchases Alice makes.

Bob then reinvests the resulting one dollar in alices company and the one he works for.

Bob hopes he will soon be able to quit his job and let another Alice take his place while he lives and amasses wealth solely off of the profits Alice(s) has/have generated via on one end her/their productivity and on the other end her/their consumption.

once bob has invested all he can get in the 2 companies and still has a dollar left over to invest he is disappointed in the inability to keep his wealth compounding at the rate it has up to that point.


bob then loans Alice 25 cents so she can spend it today and pay him 50 cents tomorrow

tomorrow Alice has no disposable income to spend on the goods she produces so

either bob loans Alice 50 cents so she can spend it today and give him $1 the following day,

or Alice stops buying the goods she produces so there is no profit for her company so it lays Alice off or closes down completely



a happy ending though as bob buys the company that formerly employed Alice for a dollar and sells off its assets or relocates it to china

bob is a "job creator" now

That sums up this thread...

**** the thrifty. This country runs on the backs of the American consumer. Chinese are thrifty and they don't have anywhere near the amount of stuff or get to go on the cool vacations we do. What's the point in that?

If they stopped saving, we'd have to stop borrowing. Their quality of life would go up, and ours would go down. How does that translate to "thrify = good"?

Then they would be paying 35% in tax.

Thinking about this: It seems strange that you would be paying more in taxes in the years when your net worth is declining. Death spiral in hard times.

I think maybe the disagreement stems from (1). Obviously capital income is income (it's in the name!), and if you choose income as a tax base, then you should tax capital income. However, the point being made is that the proper tax base is consumption. Income taxation creates a bias in favor of consuming income now, rather than saving and consuming later, while a consumption tax is neutral. Also, if you're thinking in terms of actual resources, rather than pieces of paper, consumption is the real economic event. Income is some combination of consuming real resources + saving up vouchers good for later consumption.

Well, it depends. If your net worth is declining because your income went down and you're drawing on savings to keep your consumption steady, your taxes would be the same. If your net worth is declining because you're consuming more than you used to, then your taxes would (and should) go up.

Not all saving/investing is done by people who are greatly sacrificing their current standard of living in the hopes they become wealthy fat cat job creators some day who never have to work, as some people seem to think. People have unstable income and expenses over the course of their lives. Saving during good times lets you maintain your standard of living in worse times, it's basic personal finance and rationally maximizing one's own utility.

In fact most people can have 0% capital gains tax, if all their investments go in IRAs and 401ks. Those exist because the gov wants to encourage saving to a degree because they believe, for good reason I think, that it's good for society and the economy.

All saving/investing gets spent eventually. And, in fact, I believe the most consumeristic members of American society actually play into the hands of standard of living disparity, falling into high interest debt and becoming wage slaves.

I have savings and investments (from my earnings, no inheritance or rich parents) and I'm quite confident those are improving the quality of my life, which is why I chose to have them.

Sure. To my mind, if the point was that a consumption tax is preferable to an income tax, that should have been the point. Singling out the capital gains taxes strikes me as misdirected. In other words, if we were going to compare income taxation to consumption taxation in terms of how much they incentivize (or disincentivize) saving, we should have just done that.

I disagree, as I think the focus on income is misleading. Just because governments have presented decided to tax income means we're logically bound to tax all income.

But this is inextricably connected to time preferences, as returns on investment are not based on some immutable relationship between capital and production, but are influenced by the supply and demand of investment funds.

Do you think that if everyone's discounts rates sharply increased overnight, this would have no impact on the returns on new investments? Surely not, as this would mean the supply of funds for investment would plummet to almost nothing. But if that occurred, the price of new capital goods would fall (because e.g. bricks to build a factory are cheaper due to much lower demand), which would increase the returns to those capital goods (prompting some more investment in them).


This doesn't really make sense on its face. If some people have more money than they can consume, why do they invest it so they can make even more money than they can consume?

If you're talking about them having temporarily high levels of income, then that sounds like the life cycle hypothesis. However, this also applies to poor people, but government assistance (more so in developed countries) and larger families (more so in developing countries) mean that the poor often don't need to save or invest to maintain a consistent level of consumption. Take those away and I'd think you'd see the poor with savings rates rivaling the rich.


Firstly, it wouldn't be completely independent, because that would imply that you could take anyone, cast a spell to make them much more or less patient and it wouldn't affect their saving and investment decisions at all, which seems implausible.

Secondly, time preference is not some immutable characteristic, defined by your psychological inclinations or whatever. It can be affected by factors like your income or expectations of the future. But that doesn't make it any less real, or any less distortionary to tax it.

It's like how a preference for caviar is highly correlated with income. A tax on caviar would be also be a highly progressive tax. But that doesn't mean that preference for caviar has nothing at all to do with taste. And the lack of an extra tax on caviar is not decried as some great inequity.

Just heard that most of the top 1% isn't benefiting much from low capital gains taxes. Only the top 1% of that top 1%, meaning the top 0.01%, is reaping the benefits of low cap gains taxes. So why is the 99.99% so worried about their feelings?

its quite brilliant that conservatives have designed their rhetoric in a way that so effectively encourages the couple working 3.5 jobs to have a few months living expenses in the bank to draw no distinction on the slippery slope of potentially increaced taxation between themselves and the Koch brothers

Are you arguing that capital income isn't income or that income taxes generally are a bad idea? I disagree with both, but I just want to be clear.

But the supply of and demand for investment funds is not determined by time preferences. Again, time preferences affect choices between present consumption and future consumption, not choices between consumption and investment.

I don't understand your answer to your rhetorical question, but this may simply be because I don't what it means to say that "everyone's discounts [sic] rates sharply increased overnight." Are you simply saying that if everyone suddenly wanted to consume almost everything they produce, there would be limited funds available for investment? Obviously this is true, but why does it show that time preferences determine real rates of return on investment? The question is still, essentially, whether the investment itself was wise, i.e. whether the project into which the investment was made transformed lower-valued inputs into higher-valued outputs.

I didn't say "can consume."

Nonsense. Savings rates aren't independent of income level. You concede this below, anyway. Moreover, calculating savings rates as a means of determining time preference across income levels is invalid.

What does patience have to do with anything? You're (confusingly) importing a (morally laudatory) concept into an economic discussion. I know it's pedantic to harp on usage, and I obviously understand the metaphor, but employing this sort of terminology can induce subtle forms of confusion between substance and rhetoric, since the gripe that seems to have captured your heart here appears to be, essentially, "don't punish the patient."

That aside, I thought the question was whether time preference impacts the choice between consumption and investment. It doesn't. As I've stressed repeatedly, time preference impacts the decision whether to spend or hold cash, not the decision whether to use cash for consumption or investment. That is, when you get a dollar, you can: (1) invest it; (2) spend it; or (3) keep it. Assuming there are profitable investment opportunities, any non-100% capital gains tax rate has no influence on the choice between 1 and 3.

In other words, I think the confusion may be stemming from you lumping "saving and investment decisions" here. These are categorically different. You're treating investing as a forming of saving, and arguing that, as a result, investment income shouldn't be taxed. But profitable investment opportunities don't appear simply because people want to save money, and those profits aren't some sort of moral reward for foregoing consumption.

No one is arguing for a tax on "time preference." You specifically argued that the capital gains tax should be zero. If what you meant to say was that the income tax should be zero, and we should instead have a consumption tax, make that argument. I mean, explain exactly what "distortionary" means here. Compared to what?

I have no idea what you're getting at here. I never argued that we should have capital gains taxes because they're progressive; I pointed out that the economic arguments underlying your suggestion that the capital gains should be zero were logically faulty.

Doubt if many of those couples are earning over $250,000 a year.

Because Americans believe they're temporarily distressed billionaires.

theyve been pitched and sold the idea that discussions on raising tax rates on people who will never have to work another day in their lives if they so choose somehow necessitates that their tax bracket is automatically up for the same hikes

basically fooled into using their votes to protect a lifestyle experienced by the ultra wealthy and their progeny that anyone upper middle class or lower will never have the chance to experience, good reason to buy elected office i guess, wp koch bros wp

lol @ OP

why the **** is this debate still ****ing going 9 years after it started? this was all a bull**** republican hand-waving argument then, and it's still a bull**** republican hand-waving argument now.

Question to you and others who completely dismiss or reject the argument against capital gains taxes:

Imagine an alternate, hypothetical universe where rich people have very few capital gains, but the middle class have a lot (at least relative to their other sources if income). Would you feel that the capital gains tax should be lower than other forms of income tax? Would you consider replacing all income tax with a consumption tax?

If so, this suggests that your real problem with capital gains taxes is an issue of progressive taxes and rich vs poor, not an issue with eliminating capital gains taxes itself.

There would be ways to have no or lower capital gains taxes while still having the tax system be similarly progressive, as the OP said.

The only rational capital gains rate is zero.

Anytime you have a disincentive, you get less of it. A tax is a disincentive. Therefore you get less capital investment.

The long run wealth of a country is equal to gains from trade and innovations from reinvested savings. Capital gains taxes lower savings and investment. Therefore the long run wealth of a country is lower.

Growth countries like Singapore and Hong Kong understand this and have zero capital gains taxes. It really is this simple.

By that logic, the tax on labor should be 0 as well, right?

Sounds more like the similar argument for a purely consumption tax.